Health Care REITs

The health care REIT sector owns, manages and rents out real estate related to health care. The sector contains 19 equity REITs with a total market capitalization exceeding $101B.

The major health care REIT property subsectors are:

• Medical office buildings: Typically, physician practices use leased facilities. Part of the reason is that doctors are usually saddled with huge student loan debt that inhibits their ability to construct medical offices from the ground up, a costly endeavor. Operating out of a medical office building with dozens of other practices might confer legitimacy and prestige relative to stand-alone offices.
• Seniors housing: Folks are living longer, with many finding they no longer need large, expensive homes. A seniors housing facility provides a range of conveniences and services while relieving seniors of house maintenance chores and costs. Some seniors housing REITs owns properties and lease them out to operators on a triple-net-lease basis (i.e., tenants pay rent, taxes and upkeep expenses). Alternatively, some REITs have seniors housing operating portfolios in which they own the properties but engage an operating company to run them.
• Hospitals: This subsector consists of health care REITs that own, manage and lease out hospitals. Investing in hospitals benefits from the fact that few hospitals fail, especially since the advent of Obamacare. However, sometimes health care companies merge and consolidate, which can lead to closures. The pure play in this subsector is Medical Properties Trust, with a dividend yield of 7.26 percent.
• Science/medical labs: These are specialized facilities that have unique demands for features like ventilation, electricity, water purification, architecture and more. Labs that study deadly viruses must be built to a strict set of standards to avoid outbreaks. Machines like MRIs require reinforced floors and special walls. The result is that these types of properties lease for relatively high rents.
• Skilled nursing facilities: With the number of seniors age 85 and older doubling in the next 20 years, expenditures on nursing facilities for this cohort should exceed those for younger brackets. The demand for skilled nursing facilities will continue to drive this subsector’s growth.
• Post-acute care facilities: These are facilities that care for patients once they are discharged from hospital. They include centers for rehab, physical therapy, palliative care and outpatient treatment. Many REITs owns properties in this subsector.

Health Care REITs and Economic Conditions

The health care REIT sector sits at the intersection of real estate and health care investments. It generally outperforms the S&P 500 in terms of returns and dividends, with little correlation between the two. Health care is a non-cyclical investment, as people must see the doctor no matter what the economy is doing. At the margins, a recession generally hurts health care spending as some people postpone checkups and treatment of minor conditions because of the cost. This is especially true for patients with high-deductible health insurance who must face sizable out-of-pocket expenses.

The aging of the North American population promotes demand for health care services. Medicare helps ensure that seniors will have good access to these services. The population trends will likely swamp the effects of economic cycles, but rising interest rates will marginally favor leasing of existing properties over the development of new ones. That bodes well for REIT rental income in the current expansionary environment.

Sector Performance

In the period spanning September 2002 to August 2017, health care REITs had a cumulative return of 254.92 percent and an average annualized return per year of 8.86 percent. The annualized volatility was 12.93 percent.

Largest Players in Sector

The three largest players in the health care REIT sector are:

1. Welltower (HCN): Welltower, headquartered in Toledo OH, is the largest health care REIT (market cap $24,518.5M) with significant ownership of seniors housing, post-acute care and outpatient medical buildings. In total, Welltower owns more than 1,400 properties with more than 200,000 residents. Their properties generate more than 16M outpatient visits annually. Since 2010, Welltower has been migrating from high-cost centers (skilled nursing facilities, hospitals, long-term care and post-acute care facilities) to lower cost ones (outpatient medical office buildings and seniors housing).

2. Ventas Inc (VTR): This is the second largest health care REIT (market cap $22,449.9M) with large investments in seniors housing, post-acute care facilities, research institutions, medical office buildings and health systems. Its portfolio contains nearly 1,300 properties in the U.S., Canada and the UK. Almost 30 percent of its net operating income derives from seniors housing operation portfolio and 25 percent from seniors housing triple net leasing. Another 20 percent of NOI is contributed by medical office properties.

3. HCP Inc (HCP): The Number 3 health care REIT (market cap $12,279.2M) has a highly-diversified portfolio that includes senior housing, life science, medical office, and hospitals. It favors markets with high entry barriers that benefit from favorable demographic trends. HCP combines conservative financing with portfolio diversification and opportunistic investing. The company is spinning off most of its stake in Manor Care Nursing home.